Thievery often an inside job

Heists and cyberfraud also shrink inventory

Retailing

Retailers are flourishing, thanks to the roaring economy - and so are shoplifters and other thieves who feed off the stores.

Professional gangs steal full loads of cargo. Con artists assume identities to commit check fraud. And, with the advent of e-commerce, cyberfraud poses new dangers.

National retail chains are expected to lose about $30 billion this year to shrinkage, according to research presented at a national retail conference last week in Baltimore. Shrinkage comes mostly from shoplifting and employee theft, but also from vendor fraud and administrative error.

"Shrink is something that's volatile," said Keith Wanke, a loss-prevention specialist for Musicland Group, who attended the National Retail Federation's loss-prevention conference. "If you're not on top of it, it can increase on you."

Employees are the source of more than 44 percent of the losses, according to preliminary findings of the 2000 National Retail Security Survey. Richard C. Hollinger, the University of Florida researcher compiling the survey, believes that dishonest employees will steal an average $1,004 this year.

Retailers blame the growing employee problem on the booming economy. "It's very difficult, especially right now. The market is so tight, we're struggling to hire workers," said Al Martinez, director of loss prevention for Bath & Body Works.

During four days at the Baltimore Convention Center, about 2,000 loss-prevention specialists gathered to swap tips on how to reduce theft. They put aside their rivalries to try to combat a problem that has steadily troubled retailers from discounters to upscale specialty shops.

Average inventory shrinkage during the past decade has ranged from an estimated 1.72 percent of sales to a high of 1.95 percent of sales in 1994, Hollinger said. Survey results at this point indicate a loss of about $25.2 billion this year on sales of $1.45 trillion. But Hollinger anticipates actual sales and losses of closer to $30 billion.

For many retailers, healthy economic times have meant opening new stores, which can be especially vulnerable to thieving employees as well as to shoplifters, said Edward Hacker, Kmart Corp.'s regional loss-prevention director.

"There's such a demand for people that the people we hire often have never worked in retail before," he said. For some first-timers, "there are incredible temptations, with access to cash and merchandise. With the competitive pressure to be profitable, the easiest thing to reduce is payroll, and management payroll is the most susceptible. We don't have the degree of supervision we used to have."

Because of that, retailers' loss-prevention departments are becoming much more involved in training employees to understand their roles in stopping theft from the beginning - lowering shrinkage rates at companies such as Talbots Inc. and Kmart.

But retail theft doesn't take place only in stores.

A single cargo heist, for instance, can cost retailers an average $500,000, and occur in mere minutes at any point in the distribution pipeline, said Robert Soderberg, director of logistics, loss prevention and safety for Kmart. Employees are involved about 80 percent of the time.

Thieves steal loaded trailers off the street, from trailer yards and from behind stores. Or a driver will falsely claim that a truck was hijacked, and he is getting a cut of the haul.

Retailers have begun to work more closely with law enforcement, tighten control of warehouse inventory, improve locks on trucks, better-control access to facilities, better-screen drivers and insist that third-party carriers assume liability for losses.

But "there are still so many companies that don't realize they're victims of cargo theft," said Mark Schnupp, a senior investigator with Target Corp., mainly because there is no central database for reporting.

One of the newer areas of concern is cyberfraud, with retailers typically liable for fraudulent purchases, said Paul K. Fichtman, president of Riskwise.com. He estimates that 11 percent of all Internet transactions last year were fraudulent. Typically, thieves steal identities in traditional ways, such as by stealing mail, then use the identities to commit fraud on the Internet.

"Sites that collect credit-card information are not as secure as we want to believe," said Jay Bolton, a partner, operational and risk management for PricewaterhouseCoopers LLP. "Web sites have been cracked," he said. "If people are not conscientious about the controls, it just takes one little hole to break in."

Retailers will need to become more proactive to keep hackers out, an easier feat than tracking them down after the fact, he said.

Losses from check fraud are on the rise as well, with habitual criminals causing the most damage, said Judy E. Cook of Cook Hill Girard Associates Ltd., a St. Paul, Minn., lobbying firm.